AEHR is the rare small cap that has top line growth coupled with bottom line strength. We recently discussed what comprises a defensible portfolio in tech in our recent Q3 Kickoff webinar. AEHR fits the criteria we outlined in the webinar, and is one of our largest holdings because of how many boxes it ticks.
It’s both the consistent revenue growth andand the bottom-line growth that causes this stock to defy the odds. The FY2024 guide is for 50% growth on the top line and 90% growth on the bottom line. In addition to this fiscal year 2023 cash flow grew over 500% from $1.51 million in FY2022 to $10M in FY2023.
In our pre-earnings write-up we had stated: “Aehr is within $1m of last year’s entire GAAP earnings by the end of Q3, so with the forecasted revenues for fiscal Q4 conservative net profit on revenue, Aehr will clearly grow net profit and GAAP earnings at a higher percentage than revenue growth.”
The revenue growth can be seasonal, which is why we had said “All Eyes on FY2024 Guide” in our last earnings review. The fiscal year guide in July tends to be a baseline as it’s likely the company receives more orders in the next few months and fills these in FY2024.
I believe management is doing the responsible thing – guiding to what they know today. Because the company has a small amount of revenue, a minor miss can be substantial. To avoid this, they lean “conservative.” This was discussed in the earnings call (see below).
Financials:
FY2023 and Q4 revenue were both in line at $65 million and $22.3 million, respectively. This represents FY revenue growth of 28% and quarterly revenue growth of 9.9%. EPS also came in as expected at $0.59 and $0.23, on an adjusted basis.
The FY2024 guide represents growth of 50% for revenue of $100 million. The two analysts covering the stock had a consensus of $102.5 million for growth of 58%. The FY2024 guide on the bottom line is for GAAP net income of $28 million and at least 90% in earnings growth.
Margins were flat to slightly contracted. 51.5% on gross margin was flat from a year ago. Operating margin of 25.2% was slightly lower compared to 28.7% a year ago. Net margin of 27.3% was also lower compared to 28.6% last year.
Regarding the margins, management pointed toward R&D as a primary reason the margins were down, plus product mix, material and transportation costs. At the current FY2024 guide, management is implying flat margins YoY and that’s a positive given the GAAP margins are very strong (i.e., opposite of “growth at any cost”, this is growth while maintaining a strong bottom line). G&A will increase this year as AEHR is a $1 billion market cap and auditing costs are expected to increase.
The company has $47.9 million in cash, up from $31.5 million a year ago and up from $4.6M two years ago. Operating cash flow of $5.8 million in Q4 was up considerably from (-$0.77) million a year ago. For AEHR, the exact cash flow figures are available when the company files their 10-Q/10-K. Since it's the end of a fiscal year, AEHR will be filing a 10-K.
Last quarter, AEHR had reported $33.3 million, the highest bookings in company history. The fiscal year-to-date was $72.5 million, exceeding full prior fiscal year of $62.2 million. The current effective backlog is $40 million with $15 million added in the first six weeks of the fiscal year, which started June 1st.
Earnings Call:
The main questions to focus on from the earnings call was regarding number of customers and customer concentration, hints toward if the guide was purposely low, plus product optionality with gallium nitride, higher power voltages and silicon photonics.
Number of Customers and Customer Concentration:
AEHR’s top risk remains its high customer concentration. When asked about this on the forum, I’ve stated it’s different from semiconductor companies compared to cloud software or fintech, for example. For a semiconductor company like Aehr, the supply chain limits the number of customers they have to probably a dozen or so for its total addressable market. This is different than a software company that will have thousands of customers at scale.
Regardless, it’s a risk and one we’ve covered many times. In the call, it was discussed that the primary customer (which is generally known to be ON Semiconductor) represents 79% of revenue. When we first covered AEHR, ON was about 100% of revenue.
In FY2023, the customer concentration improved to three customers representing: 79%/10%/10%. In other words, AEHR had two 10% customers. In FY2024, the company is expected to have “three or four” 10% customers.
Overall, the discussions around AEHR’s customer growth are quite bullish and likely contributed to the positive price action. For example, this was stated:
“With the addition of this latest new customer, we've significantly expanded our customer base by adding a total of four new silicon carbide customers this year. Each of these new customers is already ramping or plans to ramp our products into high volume production using our multi-wafer test and burn-in systems.
We believe this customer who serves several significant markets that include the electric vehicle industry as well as other industrial applications will purchase a large number of our FOX-XP systems to meet their publicly announced significant increase in plant capacity and revenue growth over the next several years and through the end of the decade and longer.”
Questions on FY2024 Guidance:
It was discussed (by an analyst) that the guide should be particularly easy to hit given the customer mix. The analyst felt the $40 million in backlog was especially where the guide/current information is too low.
“And specifically, if we look at this past year and your largest customer being 52 million based on the 79% and their targets of growing 300% over the next few years. I would assume that creates a solid base for your business. So, as you look at already having 8 million to 10 million booked on that, number two, you're really talking about a 30 million incremental number to hit that minimum threshold and you've already got three customers.”
Management’s response was “I felt like you were going to end it with why we're such sandbaggers but anyhow” and then went on to state that timing orders is too difficult for their business in order to guide aggressively: “It's interesting even with current customers candidly their ability to forecast is all over the map. And so, I think we've taken a conservative stance here. But it provides us with confidence to be able to hit that number. And we don't need any miracles to happen, if you will.
Total Addressable Market:
AEHR is a company where a few different TAMs are thrown around in the earnings calls. All of them are sizable, and perhaps the highest TAMs of any company we cover relative to AEHR’s size, and the products being in a unique niche with virtually no competitors.
We’ve discussed the TAM many times but here is what was most recently stated:
“William Blair forecast total demand for silicon carbide wafer is just for electric vehicles, which include EV, inverters onboard and offboard chargers to grow from 220,000 wafers in 2022 to over 4.5 million six-inch equivalent wafers in 2030, a greater than 45% compound annual growth rate and over 20 times larger in 2030 than in 2022.
In addition, William Blair expects demand for industrial applications, trains, energy conversion and RF amplifiers of silicon carbide to drive another 2.8 million wafers in 2030. This expands our silicon carbide test and burn-in market even more.”
Combined, the market for AEHR could be as large as 7.3 million wafers, up from 220,000. This is 33.2X growth. Notably, this assumes AEHR takes the entire market, which is not likely to happen even with a superior product. The product is superior because wafer level testing is up to 9 times faster than competitors as customers can test and burn-in/stabilize nine 300mm wafers at the same time compared to one wafer with competitors at 3.5 kilowatts of power per wafer.
Product Optionality:
There were discussions about AEHR’s next two major markets, silicon photonics and gallium nitride. For background on these two new markets, which would extend AEHR’s total addressable market beyond silicon carbide, please read this analysis here.
Per the earnings call, AEHR has officially received their first silicon photonics order whereas gallium nitride is in the more nascent phase of “customer inquiries.”
This system can test new high power density devices that can be used in new optical I/O or heterogeneous integrated packages. This customer is one of the world's largest semiconductor manufacturers and we expect to receive orders for additional production systems as they have increased production of these devices.”
Conclusion:
With AEHR, we broke a few of our portfolio rules. First, we have held a small cap at a high allocation. Secondly, we are holding it beyond the 10% allocation limit most portfolios (including the I/O Fund) adhere to for risk management purposes. Third, we bought close to earnings. It’s not ideal to break this many portfolio rules unless the stock is special. Clearly, we think AEHR is special. To reiterate, it’s special not only for its top line growth but primarily for its bottom-line growth, total addressable market and product optionality.